Central Garden & Pet Co (CENT) 2013 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Central Garden & Pet's Second Quarter of Fiscal Year 2013 Financial Results Conference Call.

My name is Laura, and I will be your conference operator today.

At this time, all participants are in a listen-only mode.

Later, we will conduct a question-and-answer session.

Instructions will be given at that time.

(Operator Instructions)

As a reminder, this conference call is being recorded.

I would now like to turn the call over to Steven Zenker, Vice President of Investor Relations and Communications.

Please go ahead.

Thank you, Laura.

Good afternoon, everyone.

Thank you for joining us today.

It's my pleasure to welcome you to the call, today's call, and to introduce our other speakers.

With me on the call today are John Ranelli, Central's President and Chief Executive Officer; Steve LaMontay, President of our Garden segment; and Lori Varlas, Central's Chief Financial Officer.

As a reminder, we issued a press release this afternoon providing results for our second quarter ending March 30, 2013.

The press release is available on our website at www.central.com.

Before I turn the call over to John, I would like to remind you of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

The statements made during this conference call which are not historical facts, including expectations for lower fiscal 2013 third-quarter results and future increased revenue and profitability from the Company's transformation and other initiatives, are forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those set forth in, or implied by, forward-looking statements.

These risks are described in Central's Securities and Exchange Commission filings.

Central undertakes no obligation to publicly update these forward-looking statements to reflect new information, subsequent events, or otherwise.

Now I will turn the call over to John Ranelli, President and CEO.

Thanks, Steve.

Good afternoon.

It's a pleasure to meet with you today for my first earnings call as Central's CEO, after taking the reins in the middle of the recent quarter.

In addition to touching our financial results on today's call, I would like to take the opportunity to share with you -- first, my initial observations as CEO of Central; second, our operating priorities going forward; and third, the specific actions we have just taken to increase near-term profits by reducing head count, taking other costs out of the business, and implementing price increases.

Following my remarks, Steve LaMontay, the head of our garden business, will update you on the garden season and describe for you two major innovative product introductions.

Then Lori will take you through the specifics of our second-quarter financial results.

With regard to financial results, although our revenues grew during the quarter, our margins and bottom-line results were unsatisfactory.

We are taking decisive action to improve our results.

Lori will get into the details of the quarter shortly.

Let's turn to my initial observations.

Since taking over the role as CEO mid-quarter, I have evaluated the most critical aspects of our business.

During this period, I made it a personal priority to meet with as many of our customers and employees as possible.

By my count, I met with over 30 customers and 200 employees, either individually or in small group settings.

The common theme in all the meetings was a strong belief in Central.

Our customers believe in the strength of our brands, their critical position in the market place, and their role on retailers' shelves.

Our employees believe in our plan and are committed to Central's success.

What I heard repeatedly in these meetings was that Central had historically been an industry leader in customer service, innovation, and quality.

As the Company turned inward to focus on transformation over the last 18 months, some of our customers and employees believe that we inadvertently shifted away from our successful formula of service, innovation, and quality.

With respect to the transformation, what I took away from these meetings was three principal conclusions.

First, the team has accomplished a significant amount during the past 18 months in moving the Company toward one integrated organization.

We are not the same Company we were before.

Second, not withstanding our successes, our performance during the past 18 months has not lived up to our expectations or yours.

Our transformation plan and time line were very aggressive.

Some of our transformational actions have not gone as smoothly as planned, and in some instances have taken longer than originally anticipated.

These delays and other inefficiencies resulted in delayed benefits and additional costs.

Over the last few quarters, the inefficiencies and transformation costs, along with our planned investments in marketing, have offset the savings gains we have achieved, leaving little to no benefit dropping to the bottom line.

Our under-performance is apparent when you look at our bottom line.

We need to do better.

Third, it is now time for us to move forward by building on what we did right and improving on what is not working as well as planned.

The transformational change initiatives that the Company has been working on during the past 18 months remain an important part of our future.

However, we will pursue these initiatives in a balanced way, which reflects our commitment to consistently meet the expectations of our customers.

This balance between cost reduction and growth is critical to increasing sales and improving profitability.

As we move forward, we will be guided by a simple set of priorities.

With respect to our investors, our key priorities going forward are to bring profits to our bottom line by driving profitable growth, increasing our margins, and reducing our SG&A expenses.

With respect to our customers, our key priorities are to provide customer-first service, deliver customer-first innovation, and build on the foundation we have put in place, and improve on whatever is not working as planned, all while building our brands.

If we execute on these priorities with consistent excellence and the right balance between pleasing our customers and continuous, smart expense reductions, I am confident that over the long term, we will deliver superior results to both our investors and our customers.

We have already begun making the changes necessary to achieve these goals.

While we have taken many steps since mid-quarter to move forward on our priorities, there are two specific actions which I would like to highlight for you.

First, a new expense-reduction initiative; and second, implementation of price increases in our pet segment.

These initiatives are intended to begin addressing our gross margin and SG&A issues.

We expect them to begin impacting profits in our next two quarters and beyond.

The first major action I want to discuss is the new expense-reduction initiative, which has two parts.

It is different from our transformation initiatives because it does not require putting in place new systems or fiscal consolidations.

As a result, we were able to accomplish it more quickly and with significantly less risk.

The first part was a salaried head count reduction, which we implemented at the end of the second quarter.

We consider the positions we eliminated to be redundant.

Their elimination should not have any adverse effect on any of our service levels or our businesses.

The second part, which we also began in my second month, and is continuing, is the elimination of certain non-employee expenses.

These reductions were made after identifying projects and other areas of spend where the ongoing costs were not justified by the expected pay-back.

Combined, we expect the reduction in head count and non-employee expenses will result in savings of roughly $9 million in the second half of the year.

The benefit of these savings will be partially offset by previously planned increases in marketing spend to support our garden products.

The Company's results will depend upon a number of factors, including our ability to improve our margins and successfully reduce the level of transformational costs and related inefficiencies.

Most importantly, we accomplished these expense reductions while at the same time focusing on improving our fill rates and our service to customers.

This illustrates how we are moving forward in a more balanced way.

Our second major initiative was a systemic review of pricing in our pet segment.

After completing this review, we worked with our customers and adjusted the pricing of many of our pet products.

We think these pricing actions will have a positive impact on our gross margins in future quarters.

Turning to our customer priorities, I have already talked about customer-first service.

I am bringing together leaders from our sales, marketing, supply chain, and shared-service areas to work as a team to improve our customer service.

We are just beginning to see the improvements.

As for customer-first innovation, this is vital for driving sales and profitability.

Innovation has always been an important part of Central's DNA, and combined with our new strengthened consumer marketing skills, gives us a strong foundation for future success.

An example of these capabilities is the launch of two new innovative products for this year's garden season.

The Pennington Smart Feed sprayer system and our Amdro PowerFlex pest and weed system.

We consider these two patent-pending products to be among the most significant innovations in the garden industry in recent years.

These innovations are prime examples of how we can leverage the industry knowledge of our seasoned operators with the expertise of the consumer products experts that recently joined our Company.

In fact, we received four awards in the second quarter recognizing our product innovation DNA and our enhanced marketing skills.

In our pet segment, Product of the Year USA named us the Pet Care category winner for 2013 for our new Adams Smart Shield applicator.

We are especially pleased with this award, as it is based on a survey of 50,000-plus every day shoppers.

Also, we won the Promotion Marketing Association's Silver Award in the Best New Product Launch category in the 30th Annual Reggie Awards.

In garden, Walmart named us their Outdoor Living Supplier of the Year.

Walmart also gave us the People Award for their entire home division, which recognizes excellence in partnership and collaboration.

I am very proud of our team's accomplishments.

One of my priorities is to drive and accelerate the pace of innovation at Central.

The team has already heard my refrain of product, product, and product.

It is essential to our growth and our customers are demanding it.

We need more of it.

As we move forward, we will focus unrelentingly on customer-first service and customer-first innovation.

Prior to my joining as CEO, the Company shared future targets for cost savings.

We remain committed to those initiatives that were designed to achieve these savings.

However, I believe that our performance should be measured by our overall success in achieving growth and increased profits, rather than by reaching specific cost reductions within specific periods of time.

Accordingly, going forward we will be evaluating our progress in actual profit, not against pre-determined cost-reduction targets.

Our challenge is to find the right balance as we provide our customers with the innovation and service they deserve; and at the same time, continuing to make smart cost reductions that will lead to sustainable, profitable growth for our shareholders.

In summary, in the eyes of our Management, employees, and shareholders, Central has under-performed over the last few years.

I know, but that is not news to most you on the phone today.

As Central's new CEO, I am committed to addressing our under-performance and to driving shareholder value.

Over the last couple of months, as I've mentioned, I spent considerable time talking with customers and employees.

I think that's vital.

But equally vital is an open dialogue with you, the Company's owners.

In the weeks and months ahead I intend to make it a personal priority to get to know you and for you to know me.

We have the same goal, which is smart capital allocation, intelligent growth, a higher stock price, and improved returns overall.

We will take deliberate and steady actions to transition to an integrated Company at the pace we think will achieve the highest level of earnings possible.

We are taking the necessary steps to re-balance our priorities and resources for this next stage of transition.

We are very confident that this approach will put Central on the correct path to sustainable, profitable growth for you, our shareholders.

With that, I'll turn the phone over to Steve.

Thank you, John.

It's a pleasure to be here today.

I'd like to begin with a brief update on how the garden season is shaping up thus far.

This year, spring began late in much of the country.

March and April were much cooler than normal for the Eastern half of the US.

Last year was the opposite, with spring arriving earlier than normal.

We shipped our initial sell into the garden season in the second quarter, but poor early-season weather resulted in slow consumer sell-through, and consequently low replenishment orders.

Fortunately, sales at retail have significantly improved over the last few weeks.

The garden season still has a long way to go, and most of the controls products season is still ahead of us.

We believe we have the right products, marketing, and service model in place to support our customers.

As John mentioned earlier, we launched two new exciting innovations this quarter.

For those of you who have not yet seen these new products, they offer a truly innovative way to apply control and fertilization product formulations for homeowners.

Our new Amdro PowerFlex system was designed to provide easy, cleaner way to apply home pests, yard and garden pests, broad leaf weed killer, and weed- and grass-killer products.

The new Pennington Smart Feed system is an easy and clean way to fertilize plants, with uniform lease of nutrients, its innovative sprayer and tablet system uses less water than competitive systems, and better meets the demands of consumers.

While the weather impacted early retail sales through these and other Central Garden products, we believe we are well-positioned to meet the needs of consumers and our retail partners as we continue to focus on long-term profitable growth.

With that, I'll now turn it over to Lori.

Thanks, Steve.

Our financial results are included in today's press release, but let me give you a little color.

Our consolidated sales for the quarter increased 7%, with solid revenue gains in both our pet and garden segments; wild bird feed, which is represented in both our segments, is a primary driver of the increase.

Our consolidated gross margin for the quarter decreased 90 basis points compared to prior year, due to lower margins in the garden segment.

I'll speak to the garden gross margins in a minute.

Our consolidated operating margins decreased slightly from a year ago from 9.7% to 9.4%.

So lower gross margin was offset by lower SG&A expenses as a percentage of sales.

Let me give some details on our segment results, starting with pet.

In the pet segment, second-quarter sales increased 6%, benefiting from strength in dog and cat care, professional, and wild bird seed business.

To expand a bit, in dog and cat care our Nylabone brand was aided by the introduction of Nutri Dent Complete, a new, innovative dental chew product launched in the second quarter in the pet specialty channel.

We are also comparing against a period last year where our dog and cat care business had some shipping disruptions.

Those delays resulted in some orders being deferred into the third quarter of 2012.

Our professional business also did well, due to increased purchasing by municipalities of mosquito abatement products, and gains in the farm ag channel.

Operating margin in our pet segment increased 230 basis points, aided by a mix shift, with the greater percentage of sales coming from higher-margin products.

Our pet operating margin also benefited from lower selling and marketing expenses in the quarter.

In our garden segment, second-quarter sales increased 8% versus the prior year.

Bird feed sales increased significantly, offsetting weaker sales of grass seed.

Sales of control and fertilizer products were also favorable versus a year, aided by the launch of our Amdro PowerFlex and Pennington Smart Feed products that John and Steve spoke about earlier in the call.

Operating margins for the garden segment decreased 210 basis points, impacted by lower gross margins and higher marketing costs.

The decrease in our gross and operating margins in the garden segment reflect higher marketing and promotional costs around the launch of our new garden product innovations, and lower decor and fertilizer margins.

The launch of the new garden products included display unit costs and other promotions that made the initial shipments less profitable than what we expect the margin will be on future orders.

Let's spend a few minutes on SG&A expenses.

On a consolidated basis, SG&A expense as a percentage of sales for the quarter improved to 21.4%, from 21.9%.

The improvement was largely due to the higher level of sales, which more than offset the increase in our marketing and selling expenses.

With respect to our transformation activities, we continue to pursue savings principally in supply chain areas which include procurement, manufacturing, and distribution.

In the second quarter, we completed the closure of three distribution facilities.

Since we began the transformation, we've reduced the number of our manufacturing and warehouse facilities by a total of eight.

Our second-quarter results include approximately $4 million in savings related to our 2012 and 2013 transformational initiatives, offset by transformation expense of approximately $3 million.

John mentioned earlier some specific actions that we undertook to reduce costs shortly after he started as CEO.

We should expect this benefit the second half of the year.

We incurred approximately $1 million of non-recurring expenses in the second quarter associated with these actions.

John also spoke to the importance of balance in supporting our customers and reducing costs.

While we're continuing to pursue transformational savings at a pace that is harmonized with other business needs, going forward we will only be reporting on our actual savings achieved, and not on future targets.

Additionally, we will not be distinguishing between transformational savings and new actions taken under John's leadership.

Our Q2 effective tax rate was 35.8%, compared to 36.8% in the second quarter of 2012.

In terms of bottom-line results, our second-quarter net income was $22.2 million, versus $21.6 million in Q2, 2012; and our second-quarter earnings per diluted share were $0.46 versus $0.45 in the prior year.

Let's spend a few minutes on the balance sheet.

Our accounts receivable balance is $13 million, higher than last year due to the increase in sales.

However, while AR was up, our DSO slightly improved.

Our inventory balance at the end of the quarter increased from the prior year.

There are three reasons for that increase.

First, as we've highlight in prior calls, we deliberately raised our inventory levels this year to ensure we could meet the needs of our customers.

Secondly, we built inventory in support of our product launches of the new Amdro and Pennington innovations.

Lastly, with the late start to the garden season, we had more inventory at the end of the second quarter than in prior years, and readiness for the garden season.

Our increase in inventory was focused on our higher-revenue items and supporting our product launches, and were not across the board.

We anticipate the balance will decrease as the garden season progresses.

Net debt was $565 million, up from $539 million a year ago, partially reflecting our increased investment in inventory.

Our total leverage ratio at quarter end was 5.1 times, above our year-end targeted range of 2.5 to 4 times, but lower than last year's 5.5 times.

Keep in mind that seasonally, our borrowing needs peak during our second quarter as we build inventory for the spring garden season.

Our borrowings then come down significantly as we approach fiscal year end as we collect on our trade receivable balances from the garden season, and pay down our revolver.

Our capital expenditures for the second quarter were $8 million, flat to last year, and depreciation and amortization increased to $8.3 million, versus $7.6 million in the prior year.

We did purchase a small amount of stock for $1.5 million during the second quarter.

We have $50.1 million remaining under our board-approved share repurchase program.

Before we go to Q&A, I want to comment on our expectations for our third quarter.

As you may recall, in our pet segment we had very strong third quarter results a year ago, as we've benefited from initial sell-in of our flea and tick products in the new channel, and the launch of our new innovative applicator.

We will not have a similar initial sell-in benefit like last year, making for difficult year-over-year comparison.

In addition, last year we shipped some backorders for both pet and garden in the third quarter.

These shipments were delayed out of our second quarter in 2012, increasing our third-quarter 2012 sales, making for a difficult compare.

Based on these events, we believe it's likely that our fiscal third-quarter 2013 results will be lower than the prior year.

In summary, we're intently focused on driving shareholder value for a balanced approach of reducing cost while growing revenues through superior customer service and product innovation.

Thank you for joining us on the call this afternoon.

Now John, Steve, and I would like to take your questions.

Operator, would you please open the call to Q&A?

Certainly.

At this time we will begin the question-and-answer session.

(Operator Instructions)

Our first question is from Joe Altobello of Oppenheimer.

I know you guys aren't going to talk about the transformation, in particular, going forward.

You're kind of lumping it in with the other cost savings.

I am just curious where that stands today in terms of the progress you made.

Is the $120 million target that you put out there 18 months ago still something you are aspiring to at this point?

Great.

Well, thanks for the question.

Just as a recollection of what we've achieved thus far, we've talked about we integrated more than 20 separate business, we consolidated facilities.

We've reduced our ERP systems.

We've built supply chains and share-services organizations, reduced SKU count, built master brands, and additional items.

So we continue to focus on that transformation going forward.

We believe there's significant opportunity to improve our results.

However, we won't be reporting specifically on the $120 million going forward.

We are going to work at a pace with more balance towards really focusing on our customer, growing the business, in addition to achieving cost savings.

So specifically reporting on the $120 million going forward, we won't be reporting on that.

What we will do is talk about our profitability and accomplishments in a given quarter.

Right, I understand.

I am just curious if that $120 million is still operational at this point?

We believe that we have significant sales and margin opportunities beyond just cost reductions.

Our plan is to increase profits with a balanced approach of increasing sales and improving gross margins, while still implementing cost reductions on a time frame that makes sense for our business and taking profits to the bottom line.

Joe, I think we really believe the opportunity still exists, but the pace and there may be additional items that we put on our transformation work as we go forward.

So we think there's significant opportunity.

Okay.

Shifting gears to the pet price increases you mentioned earlier.

Could you quantify what the impact that might be on top line in the second half?

We went through our really detailed review of our pet SKUs.

We have taken those into account, worked with our customers, they are going to roll out over the coming months.

We haven't quantified specifically, but we certainly think if we balance price increases with the cost of our products that it should have a positive impact on our financials.

Okay.

Thanks, guys.

Our next question will be from Bill Chappell of SunTrust.

Can you just talk a little bit -- just as we look at both this quarter and the third quarter, if you take out kind of the easy comp this quarter and the tough comp next quarter, what would the growth rate look like?

Would you be posting growth for both quarters, or is it more than just the tough comp?

We think that the third quarter -- clearly, we're early innings of the garden season, given it broke late this year.

We think we are well-positioned with our products and marketing and the team is ready to go as this unfolds.

We think there's certainly opportunity to build our businesses in garden.

But if you look at year over year -- take April, for instance, last year -- our April month was, when compared 2011, was up in the 18% range, just for that month alone.

So we had a very high comp compared to April.

That being said, we've got a lot of season to go this year in 2013, and with new product innovations, we are certainly driving to build our business.

But year over year, pretty tough comp.

Would your third-quarter results be below year ago, even without the comp?

We're not --

Are trends improving or are they deteriorating a little bit near term?

For the garden business, year to date we're showing slight gain from a sales standpoint.

We have high expectations for in-season performance, not only resulting from the new innovations, but strong support across the board for our garden business.

We are encouraged by recent point-of-sale trends, where we're looking at nearly 20% growth for the point of sale on our products in the most recent period.

Yes, that's on the garden side.

A quick on pet, as we talked about during the call, we have another tough year over year compare, given we had some initial sell-in in a new channel last year that obviously now ongoing business.

Okay.

Just one to make sure I understand.

The price increases, the cost-cutting that you are doing in the second half, that will be largely offset this year with higher marketing.

So you don't expect to see a benefit to the bottom line this year.

Is that right?

We are certainly looking to target some of that to the bottom line, but we are going to make smart investments.

We need to support our product launches, both on the garden side and the pet side; and then work to improve profitability over time.

Okay, great.

Thank you.

The next question is from Frank Camma of Sidoti.

Great.

I know you don't report sales by brand, but I was just wondering if you could give us some indication of how your -- and clearly seed business has been impacted -- but whether you can give us any trend in the market share that you're experiencing there?

Are you referring to our garden grass seed, bird seed --?

Yes, I'm sorry.

The grass seed business, specifically.

What I'll say is, first of all, we have had a strong performance on the grass seed business over the last few years, growing the Pennington trademark, and most notably in the premium segment of grass.

It's a little bit challenging to give precise market share information.

The garden category, you may or may not know, is not tracked by most syndicated data sources for point of sale.

We're -- we think we ended up last year on multiple data points was modest share growth on the grass seed business, and the data that we have thus far, which is more anecdotal, again, than syndicated information, shows us that modest share growth again.

Okay.

Not to keep focusing on Q3, but if that's the case, and we're very early in the season, obviously -- and obviously the cold weather in the first quarter -- wouldn't you expect to see fairly decent gains, at least in the grass seed business in the third quarter?

Yes.

Last year -- let me put it in a little bit of perspective.

Last year was a very challenging year for the grass seed category.

By all indications that category actually declined about 15% last year, coming off of an exceptionally mild winter in the 2011-2012 season.

This year, we have had expectations of a stronger comparative season.

Thus far that hasn't materialized.

The good news is in our most recent week basis and four-week basis we see double-digit growth in the grass seed segment for us.

So we're hopeful and encouraged by the warming weather in the northeast, southeast, and midwest, which are the highest-volume grass seed markets overall.

We have a lot of season still ahead of us for you really to call it.

Sure.

Yes, understood.

Great.

Just a clarification, really, on the savings or the non-recurring charges.

Lori, I think you mentioned $1 million of non-recurring charges in the quarter.

Is that correct?

There's two pieces.

Going forward, this will all be merged together and I think it will be cleaner.

As you think about our transformation costs, we incurred about $3 million of transformation costs.

When you think of what's in there, it's things like severance or you've got a work force that might be working in two locations as we consolidate a location.

Pre the consolidation they're working together and you've got clean-up.

It has a bit of tail after we merge the two together.

So there's some, obviously, costs associated with like consolidating facilities.

There could be lease costs in there as you have a lease overlap period.

So those are the kinds of things that we include in our transformation costs.

As it relates -- there was another number I gave you, which was a $1 million, and that was specifically related to the actions that John mentioned under his leadership were taken in the most recent quarter.

Those are more severance and salary-reduction-related, correct?

Yes.

So those would hit SG&A versus the other ones that might hit cost of goods sold?

For the most part, yes.

Okay.

A final question is just if you could just give us some perspective on the tax rate going forward.

It was a little lower than I expected.

Is that something that we should see -- should kind of model going forward, or will it creep up over time to where you were at last year?

Sure.

Happy to talk about that.

This year, as you mentioned, our tax rate was 35.7% versus 36.8%, and that was primarily attributable to tax credits available during the quarter.

As we move forward, we expect that rate to be down maybe slightly as we make our way through the rest of the year.

You would expect the tax rate to actually go down?

Is that correct?

Compared to the last fiscal year.

To last year.

Fair enough.

Thank you.

Yes.

Our next question will come from William Reuter of Bank of America.

You noted that POS for the most recent period was up 20%, and in some of your garden -- was that garden or was that pet?

Do you know -- can you tell us how that was on a year-to-date basis?

Yes, so what Steve was referring to is the point of sale for the last four weeks -- what we see in the month of April.

Again, the spring season came late, and he was referring specifically to gaining traction with consumers at take-aways through our POS.

Okay.

Do you have -- I guess I'm just curious how, given the bit more challenging results at POS early due to weather, how kind of if we were to think about that plus April.

The first four months of the year, how that POS might have trended?

Sure.

So we were down -- the category was down at the beginning of the season.

The beginning of the season, just to put a perspective, is a very small percentage of the total garden season.

As you think about this, we have much of the garden season ahead of us, certainly for the controls business, in excess of 60% of the point of sale going forward, and slightly less for other segments of garden.

The numbers that I quoted before are for the point of sale of our products on our most recent four-week basis, which has us up nearly 20%, which is good.

But again, the beginning of the year looking at calendar year Q1, was a very, very soft period comparatively to the year before for the whole category.

So our expectation, we are encouraged by the four-week and weekly trend that we see now, and weather forecasts are favorable for the highest-volume markets for the balance of the season.

Okay.

Then you talked about two challenges to third-quarter, year over year, top-line trends.

One was the introduction of the flea and tick products.

The second was the later shipments that positively impacted third quarter of '12.

Do you know how much the two sum of those might have been in dollar terms?

We haven't quantified those.

Last year, you may recall, when we talked about that -- when we were first trying to quantify it, we were actually in the second quarter of 2012, and the third quarter is often times -- an order might come in; and while you might not ship it that day, you might ship it the next day.

So it just makes it challenging to figure out in a quantitative form.

I go back to how we perform for the quarter.

If you look at the third quarter garden last year, it was up significantly in 2012 over 2011, largely due to those shipments that slid from Q2 to Q3; and they were comparing against that tough third-quarter comp this year.

Okay.

Lastly for me, bird seed was called out as an area of strength in both of your segments.

I am curious how much of this might have been units versus price?

Just to get a sense of where those key inputs are going on a year over year basis, the comparisons for the next couple of quarters?

Sure, taking that in two pieces.

As it relates to bird seed, on the garden side it was volume and pricing helped us with our revenue gains.

If you thinking out pet bird seed, it was primarily pricing, but volume also was a secondary driver of those sales gains.

I'm sorry.

Can you please repeat the second part of the question?

Yes, just where those input -- I guess where the input costs for the back half of this year, whether those are going to be at favorable year over year comparisons to last year, or kind of at similar levels?

So the mila, millet, sunflowers, that stuff.

Yes.

If you look at the broader trends, you think about 2011 and 2012, commodity prices rose quickly and they rose steeply.

We spent a good part of the time chasing the pricing, trying to catch up.

Those have somewhat stabilized; somewhat our pricing has caught up, and certainly helps the margins for bird seed.

But as we look across the summer into fall, we're really going to have to wait and see how the yields from farmers and the markets play out.

Probably too early to call.

If you think about most recent trends, while certain commodity costs such as sunflower have come down over a year ago, things like millet have really escalated quickly.

It's been a bit of a mix change as far as what's higher or lower, so wait and see how it plays out in the months to come.

Okay.

Thank you for all the questions.

You bet.

The next question is from Carla Casella of JPMorgan.

Hi, this is Paul Simenauer on for Carla.

Hi, Paul.

First, I just wanted to see -- you mentioned your pricing is out of line in pet.

Can you discuss how much of the pet categories your end is made up of private-label product?

Yes, we haven't broken that specifically.

Private label is an important component for both our pet and garden segments, so we haven't broken that specifically.

Okay.

Are you seeing growing penetration at all in private label in the pet categories?

Well, I think, as we think about our retailers, private label is an important part of their portfolio.

It's really advantageous for us, because we play in both.

We work with and collaborate with our retail partners in both the branded space, as well as the private-label space.

So they are both important parts of our portfolio.

But you obviously haven't seen any penetration there, growing penetration?

Again, I think the longer-term trends have certainly grown over the --over the last ten years, you've certainly seen growth in private label out in the -- in all categories.

Again, I think we play in both those spaces so it's basically a nice position.

What is the typical price differential between private label and branded?

Gosh, we are in so many different categories, and it varies from private label to private label among our retailers.

Hard to call that out.

One last one.

Do you guys anticipate any margin pressure from higher corn prices this year, and are you hedged?

If you look at the major components of, for instance, our bird seed, it's mila, millet, sunflower, and corn.

Corn is certainly a component of that.

The real pressure this year has come from millet.

It's really rose quickly and steeply this year.

We'll see how next year plays out.

Thank you very much for taking my questions.

Thank you, Paul.

The next question is from David Mann of Johnson Rice.

Good afternoon.

Welcome, John.

Thank you very much.

It's a pleasure to talk to you.

In terms of what you're talking about on the third quarter for the -- for your third quarter guidance, I guess the question I would have is what kind of garden season are you kind of embedding within that guidance, given the sort of Jekyll and Hyde nature of the season thus far?

As we think about the third quarter again, we're early.

We have seen certainly strength in the last four weeks.

As Steve alluded to, there is a lot of garden season ahead; and I think we are well positioned to take advantage of that.

The season is later.

So if you think about the garden season historically, for the most part it spans Q2 and Q3.

Sometimes it's a heavier sales period in March and sometimes in April, May, June, more the later part of the season.

This year it slipped from the second quarter to the third quarter more heavily.

Yes, and I would just be reinforcing Lori's comments.

We have two strong innovations in the market place.

We have exceptional retailer support behind those innovations and the amount of (inaudible - background noise) garden portfolio.

The season that has gotten off to an extremely slow start, weather related, is beginning to pick up.

We are encouraged by where we are and where weather is at this point.

Okay, thank you.

In terms it of the comment in the release about the decor business, can you just elaborate a little more what's going on there?

Is that something we should expect further drag going forward?

Yes.

As it relates to our second quarter compared to Q2 in 2012, this year we had a product launch where we had some products we put on our retailers' shelves, and that certainly impacted our sales second quarter.

Okay.

Then in terms of flea and tick, I know you called out the tough compare from the launch last year.

But in general, how would you characterize how the flea and tick season has been thus far this year, and what would you expect that to -- how would you expect that to continue for the rest of the season?

Yes, it's interesting if you think about the flea and tick.

There is absolutely a seasonality to it.

There are others who buy flea and tick products year round.

This year, obviously weather impacts that.

Just like the garden season has slid, the flea and tick has slid as well, kind of following that same weather pattern.

I think we'll just wait and see how that plays out.

You kind of gave a little bit of information on the garden side in terms of POS.

Has the flea and tick business sort of recovered as much in the last several weeks?

I don't have that information available.

We will have to have the head of our pet segment join us at some point, but I don't have the point-of-sale in front of me.

But I think with regards to flea and tick, I think we've got great products, we're well positioned, and we're looking forward to the season.

Okay.

Thank you.

(Operator Instructions)

Our next question will be from Gregg Hillman of First Wilshire Securities Management.

John, can you just talk about the importance of manufacturing to the Company going forward?

In particular, what percentage is contracted out, versus manufacturing in house.

Are there certain key areas that you are going to retain in manufacturing?

Also, are you going to do like some sort of big consolidation in manufacturing into some big 200,000-square-foot plant, something like that?

As we talked about in the transformation, we started some of the consolidations.

But at this point in time we're evaluating our alternatives.

But I would not expect in any way a major change from the way we're manufacturing things today versus sub-contracted.

Do you know what the mix is right now between in-house and sub-contracting for the whole Company?

No.

It really -- and I'm not sure it's a meaningful number, because it's so different by business to take a look at our whole portfolio, the numbers --

Right.

Some is 100% US-made.

Some has a larger portion.

When you take an average, it's like having one foot in water and one foot in ice.

It just doesn't really make any sense.

But in addition to just sourcing and supply-chain rationalization, you expect to have cost savings in manufacturing on a shop-floor level, too -- improved efficiencies?

Oh, of course.

As we mentioned, while we've slowed down the transformation, we still believe in the transformation going forward.

As our transformational activities that we supported are back up to our standards, and really makes sense for our business, we will be continuing our transformation.

Okay, great.

Thanks very much.

Our next question comes from Hale Holden of Barclays.

Just two really quick ones.

On the pricing actions you're taking in pet, I guess I was curious how you feel about the elasticity of the product there, and why you think you have the ability to take those pricing increases?

Obviously doing price increases is a very delicate thing, and we took a lot of time and really analyzed just about every aspect of where we were taking the increases.

We took -- and elasticity was a big factor in our analysis.

We feel very comfortable that we targeted areas that we would not take a significant decline in unit volume as a result of our pricing change.

Great.

Then last question from me is you gave the longer-term leverage of 2% to 4%, but John I was wondering if you had any thought on excess cash or how you are thinking about capital allocation, whether it was debt repurchases, further share buy-backs, or M&A?

Yes.

From a cash perspective, let me just kind of outline for you how we think about use of our cash.

The first and top of our list is investing back in the business.

Clearly, we want to invest in our brands, our business, for growth.

Behind the internal -- investment internally in our operations would be M&A, and we are always out there looking at what companies might be accretive to our bottom line, might be a good fit, whether large or small.

We've got lots of relationships out there, and always looking for something that might be a good fit for Central.

Then the third on our hierarchy would be share buy-backs, stock buy-backs.

That's generally how we think about how -- the use of our cash.

I guess you feel like you have -- you've been getting a lot of balls in the air right now.

You feel you have the ability to do modest (inaudible) M&A should it occur, if it was accretive.

You are not solely internally focused at the moment?

I think it depends on what it is, and what the opportunity is, but we're always keeping our eye out there.

As John described, we want balance.

So we make sure that whatever we take on we can do a good job and deliver the benefits to the bottom line.

Great.

Thank you very much.

Our next question is from Kevin Seagraves at Fort Washington Advisors.

I was curious from, I guess, with a couple things.

From your conversations with customers and talking about maybe there was a change in your ability to service the customers, et cetera, have you seen anything that would indicate any kind of damage to the customer base in terms of your ability to -- I mean, just in terms of the business in general that can't be fixed?

No, not in any way, shape, or form.

In fact, we are started on the process; and we are seeing significant improvements already in some of our service levels, and our customers are responding very positively towards that improvement.

This is Lori.

Just to add to that, as you might recall, in the second quarter of last quarter -- excuse me, of last year -- when we had those disruptions, it was that as we merged a couple of facilities together it was disrupted.

We worked very hard over the course of the last year to ensure that we were servicing our customer well.

I think the season attests to the fact that we have gained ground there.

Right.

I think discussed previously, we did impact some shipments in the beginning of the garden season last year.

As John and Lori pointed out, the organization worked diligently to this point -- continues to work diligently on making certain that we are ensuring fill rates that meet the requirements of our customers, and those metrics are dramatically improved this year versus last year.

I think that's one of the contributing factors that had us get the award from Walmart as Vendor of the Year in outdoor living.

I guess I was just trying to -- I'm trying to understand the desire or the need to slow down the transformation if things were getting better.

Had you already started to slow it down?

I'm just trying to connect the dots there, I guess.

We started to slow it down last quarter.

Right now what we're doing is we're going around and finding all of the areas that are not meeting or living up to our expectations.

We're improving on those areas, and as those improve to our levels of our satisfaction, then we will continue to the transformation; and we'll continue it on the basis that it makes sense from both a timing and an amount to our shareholders and our Management team.

Okay.

Then with the inventory levels where they are, I guess, given the visibility you have right now, does that -- do you see that changing the way you need to run the business during the season, or is it going to depend on the weather, or can you comment on that?

Great question.

Again, the reason our inventory levels are up are really three-fold, right?

One, we want to ensure we can meet the demands of our customers, and we've built inventory for that.

Product launches and growth in pet and garden; then of course the late garden season.

We were ready for the season as we exited March.

It just broke a little bit later.

That's a contributor that increased.

As we think about going forward, I think as the season unfolds we will certainly see those inventory levels come down.

I think -- based on what we know today -- I think we're in good shape from an inventory perspective.

We will always be focused on how do we improve the best use of our working capital.

But these priorities really roll off the top given where we are today.

As we evolve over the coming months, we anticipate those balances to come back down.

Then you talked about taking some of the savings and investing them in marketing.

Then you talked about costs to promote the products.

Can you talk about -- is that proactive, because you have got a lot of new releases?

Is that response to competitive activity?

Can you just kind of talk about the drivers and what's kind of not only in this quarter, but then kind of going forward, the drivers behind the marketing spend and the promotional spend?

Sure, and I'll let Steve add to this, but just kind of in general, we want to be a strategic about how we spend our marketing dollars.

In this year we had some important product launches, and it was important that we invest behind the -- behind those introductions in support of our customers to draw the consumer to the new innovations.

As we look at our second-quarter results, we had -- those initial shipments had promotions, they had display units that impacted our results.

But going forward, we certainly expect profitability around those new products to pick up, so the initial investments will launch the project - -product -- right, and bring consumer awareness to the new innovations.

The only thing I would add, as John mentioned, we are committed to accelerated profitable growth.

We have two strong brands in Pennington and Amdro.

In the case of Amdro and Pennington, we have two break-through innovations that demand that they be well-supported in the market place, and we're going to make sure that we do that.

Okay, great.

Thanks.

The next question is from Carter Dunlap of Dunlap Equity Management.

Hi.

In answers to some of the earlier questions just now, I'd say it's probably the first time since December I have kind of heard and understood sort of the logic behind the slowdown of the transformation.

As you just answered, the year-ago stock-up problem was sort of an early onset of the season, and then you said the first sort of movements towards changing delivery sort of performance has just been this last quarter.

I guess my question is, is it -- I know we're not going to discuss quantitatively any more.

But qualitatively it sounds like goal one is to make sure you get your delivery performance back up.

Then would you say number two is -- I mean, originally we were talking about capital intensity and ultimately long-term costs.

So once you address that as the prior question or two questions ago, I mean, it seems like your delivery rates are already back where they ought to be.

I guess a lot of us are still confused as to why the brakes are on so much on the transformation.

Maybe you could try to elaborate?

I wouldn't say that the brakes are on, on the transformation.

That's just not true.

We are continuing certain aspects of the transformation, such as in our purchasing and also in our OpEx.

Those are continuing and active and moving at a relatively quick pace.

The areas where we have had our internal challenges as we've changed systems, we've changed procedures, we're just bringing those back on now, focusing on them, and making sure that they're living up to our standards.

While our fill rates have gone back up or are coming back up, they are still not to the levels that we feel very comfortable with.

But aren't fill rates a function of working capital?

They are a function of working capital and many other things, as well, including forecasting capabilities, et cetera.

Okay.

I'm just trying to help shape what I think a lot of us are trying to figure out.

Thank you.

You are welcome.

Maybe this to help, Carter.

As you think about our procurement savings, we're still pursuing those very diligently, looking to make sure we drop that to the bottom line.

But as it relates to facility consolidations, we just completed three of them.

We want to make sure that those are completed, that the people are trained as they ought to be before we take on the next one.

That might be illustrative of the thoughtful process we're going through.

Okay, thanks.

Our next question will come from [Steve Crystal] of Clark Estes.

I was wondering when you talk about the long term, what sort of economics I should be thinking about.

When I look back over the recent years of this business, it seemed that the operating margins were in a range of 6% to 8%.

They fluctuated a little bit, but that was kind of a range.

Is that still a reasonable range to think about?

One of the most impressive things that I have seen since I've been here, that the opportunities to grow revenue and increase margins are really significant for Central.

It's really too early to tell how high and when we can drive margins and revenue growth.

Right now we're totally focused on increasing our sales, improving our gross margins, and reducing our costs.

I believe that if we focus on these, the actual results will tell the story and we will deliver increased profits quarter by quarter.

Okay.

Just as a quick follow-up, is there anything that you've seen in your short term so far evaluating the business that suggests that you couldn't do that kind of historical range that the business once did?

Again, I would just say it's too early for me to give you a read as to how high and in what time frame.

Okay.

Thank you.

And the next question is from [Gary Polthash] of PTA.

Yes, good afternoon.

If you look, Lori commented on balance.

And if you look at the past four quarters of this Company, and certainly on the stock performance, it's been under-performing.

So Cent has two stocks trading.

CENT and CENTA, where you have the Director, Chairman of the Board of Directors controlling the voting shares and basically potentially not creating an independent Board.

What are you looking to do to change this impression?

I think that the capital structure and the voting structure of the Company is really a Board issue.

I do know that the Board reviews it quite often and feels very comfortable with the capital structure and the voting structure that we have.

But it's not an independent Board, and you've had shareholders complaining, major shareholders complaining for change.

What kind of change is the Company going to institute with respect to four quarters of poorly performing stock price?

Why should I be a shareholder of Central?

I think you should be a shareholder of Central because of the business opportunities that we have in front of us.

I think that we treat all of our shareholders the same; and I believe that the Board considers our options with regard to our Capital structure and does it in a very diligent way and feels comfortable with the way we are today.

I disagree.

It's just -- if you had a situation where you had everybody equally voting, you would have an independent board.

You don't have that, and that's what's creating a reluctancy of investors.

I believe our Board considers themselves very independent and we are very comfortable.

I'm sure they do.

But it's perception, and that's why the stock is stuck in the mud.

Well, I'm hoping that as part of going after the new opportunities that I talked about in sales and gross margins and taking our balanced approach, I think that we have significant opportunities ahead.

Last question, John.

Have you purchased any shares in the open market?

I have purchased shares in the open market.

I think I own about 60,000 shares.

That you purchased out of your own pocket, money out of your own pocket -- not option?

Some of which I paid out of my own pocket, some of which was my compensation.

All right.

Thank you so much.

Next we have a follow-up question from Gregg Hillman of First Wilshire Securities Management.

Yes, I was wondering if Steve could talk about the underlying growth of the segment for garden; and maybe somebody could address that for pet also, or sub-segments within those categories -- just with what the industry's going at.

Yes.

We've got a lot of different businesses.

Each of our segments are all growing at different rates.

I think from a standpoint of going forward, we hope obviously to grow faster than the market and take share.

That would be our objective.

Yes, I would agree with that, and where we are in category overall is low single-digit growth.

As Lori said, our focus is to do significantly better than that category growth rate.

The expectations that we have for this year are doing better than the category growth rate.

But is the category -- is each of those categories growing faster than GDP or stronger than GPD?

Different categories have different growth rates.

As I alluded to in a earlier question, unfortunately, this is a category that does not have robust syndicated data recording, similar to most other consumer packaged-goods companies that might have IRI data or Nielsen data that gives you a very accurate glimpse of all of the individual sub-segments of the category.

As you look at the published reports that are out there, what is quoted on a macro basis is low single-digit growth.

Obviously, within our portfolio, there are varying degrees of performance.

I think for competitive reasons right now, I think we'd rather not get into our own projections of where we think those segments will go going forward.

Okay, thank you.

This concludes our question-and-answer session.

I would like to turn the conference back over to Steve Zenker for any closing remarks.

Thank you for joining us today.

We look forward to speaking with you in the future.

Thank you.

Thank you for your questions and for joining the call today.

I look forward to talking to you in the very near future.

Bye.

The conference is now concluded.

Thank you for attending today's presentation.

You may now disconnect.